ERP Subcontracting: Efficiently Manage Outsourced Manufacturing

The problem: When production at the factory gate goes unseen

Why outsourced production steps quickly lead to a loss of control

Contract manufacturing is indispensable in many manufacturing companies. Specialized processes such as heat treatment, surface finishing, coating, or certain assembly and machining steps are often not economically feasible to perform in-house. Some companies outsource processes to cope with capacity peaks or to respond quickly to a machine failure.

The problem is not outsourcing itself. The problem arises when internal and external work steps are managed in different processes, systems, or tables.

As long as the material stays in-house, the production management can usually trace which machine is processing a job, which operation follows, and how much has already been produced. Once the parts leave the company, however, it often becomes a blind flight. Purchasing knows the order, production knows the manufacturing order, the warehouse knows the goods issue, and the contract manufacturer communicates by e-mail, phone, or delivery note. A shared, up-to-date view of the overall process is missing.

As a result, key questions remain unanswered:

Which raw parts or semi-finished products are currently with which service provider?
Have all required materials been handed over in full?
What quantity has already been processed?
Which parts are still in progress, blocked, scrap, or in transit?
Which internal manufacturing order corresponds to the external order?
When will the processed parts be returned?
Which subsequent operations depend on the return delivery?
Which customer orders are affected if the external process is delayed?
Do the calculated external service costs still match the original estimate?

If reliable answers are missing, subcontracting becomes a disrupted value chain.

A typical day-to-day scenario in practice

A manufacturing order initially goes through several internal steps. Then the parts must be sent to an external surface finisher. In the ERP system there is indeed an order, but the processing status is only in an email. Some of the goods are already with the service provider, another portion is still in our own goods issue. Scrapped parts were reported by phone but not yet entered into the system.

The production planning continues to assume the original return delivery date. Downstream machine capacity remains reserved, even though the material will not arrive in time. Only shortly before the planned production start does it become apparent that the parts are missing. Now, planning, purchasing, production, warehousing, and sales must improvise together.

From the missing status, ad-hoc rescheduling, machine downtime, urgent express trips, and difficult conversations with customers arise.

Causes: Why contract manufacturing becomes opaque in practice

The most common causes of problems with subcontracting

Loss of control rarely arises from a single error. More often, several organizational and technical weak points interact with each other.

Contract manufacturing is treated only as an order

An external operation does trigger a purchasing process, but it is at the same time part of the production flow. If only an order is created for the service provider, the direct connection to the production order, to the original material requirements and to the subsequent steps is often missing.

Purchasing then sees that a service has been ordered. Production, however, does not automatically recognize which quantities have already been shipped, when the return delivery is expected, or how a change in timing affects the entire order.

Internal and external operations run in separate planning

In many plants, machines and internal workplaces are planned in detail. External operations, by contrast, appear only as a lump-sum delivery time or as a manual note in the work plan.

Thus, there is no continuous schedule. The external processing time, transport time, goods receipt inspection and possible transition time are not reliably linked to the internal steps. If a part returns later, the impact on subsequent operations and customer orders remains invisible for the time being.

Supplied material is not recorded as inventory at the contract manufacturer

Material that is physically no longer in one's own warehouse is not automatically consumed. It still belongs to the company and must be traceable in terms of quantity and value.

Without an external or supplier warehouse, this stock often disappears from operational view. The parts have been booked out but not yet processed. Thus it is unclear which quantities are at the partner, which have already been consumed and which must be returned after completion of the order.

This becomes especially critical for high-quality materials, customer-specific components, batch materials, or large amounts supplied.

Feedback is late or unstructured

External service providers often report processing statuses by phone, e-mail, PDF, delivery note, or a custom Excel file. This information must then be manually transferred.

This creates a time gap between reality and system status. The operation at the service provider may already be completed, while internally it is still recorded as open. Conversely, a deadline in the ERP may still appear as secured, even though the contract manufacturer has already announced a delay.

Scrap, rework and partial deliveries are not captured cleanly

Not every delivery comes back complete and fault-free.
In practice, the following occur:

Partial deliveries
Over- or under-deliveries
Scrap
blocked quantities
Rework
unplanned additional services
Remaining material at the contract manufacturer

If these deviations are documented only on the delivery note or in an email, production quantity, stock, costing and open remaining quantity no longer align. The system may then plan with parts that are actually not available.

Changes do not reach the external partner in time

If drawings, specifications, quantities, deadlines or quality requirements change, this information must reliably reach the contract manufacturer. If there is no seamless link between the production order, documents and the purchase order, version conflicts are likely.

In the worst case, the service provider processes material according to an outdated drawing or incorrect process instruction. The consequences range from rework and scrap to the complete loss of the supplied parts.

Actual costs are not fully included in the post-calculation

Contract manufacturing costs are not limited to the service provider's invoice amount.
In addition, there may be:

Outbound and return transport
Packaging and load carriers
internal provisioning
quality inspection
rework
scrap
additional procurement and coordination times
express surcharges
scheduling delays in internal production

If these costs are not captured by order and operation, the actual profitability of the order remains hidden.

Impact: When a lack of transparency endangers profit and delivery capability

What uncontrolled subcontracting means financially

Problems with extended outsourcing are not limited to purchasing or production. They affect almost all areas of the business.

Area	Operational consequence	Economic impact
Area Production	Operational consequence Material is missing at the planned start of the next operation	Economic impact Machine downtime, extended throughput time
Area Scheduling	Operational consequence External deadlines are updated too late	Economic impact Frequent rescheduling and unstable production plans
Area Purchasing	Operational consequence Processing statuses must be requested manually	Economic impact High coordination effort and rising process costs
Area Inventory	Operational consequence Auxiliary materials cannot be unambiguously located	Economic impact Inventory discrepancies and unnecessary re-procurement
Area Quality	Operational consequence Batches, rejects or rework are not fully traceable	Economic impact Higher risk of complaints and liability
Area Sales	Operational consequence Delivery dates cannot be reliably confirmed	Economic impact Loss of trust and potential revenue shift
Area Controlling	Operational consequence Additional costs are missing from the calculation	Economic impact Unnoticed margin loss
Area Management	Operational consequence Supplier performance cannot be evaluated objectively	Economic impact Weak basis for awarding decisions

Delivery dates become unreliable

The return of a part processed by an external supplier is often a prerequisite for several subsequent operations. Even a short delay can therefore shift the entire production order.

Particularly problematic is that the delay is often only visible late. Without integrated scheduling, internal capacity remains reserved. Other orders may be postponed, even though the intended material for the prioritized order is not yet available.

Machines and personnel are waiting for material

If a planned operation cannot start due to missing return, idle time and additional setup operations occur. Dispatchers must quickly find replacement orders, adjust machine allocations, and reassign staff.

These costs rarely appear as a separate line item. However, they directly reduce productivity and increase manufacturing costs.

Safety stock and duplicate procurement tie up liquidity

If no one trusts the system stock at the contract manufacturer, safety mechanisms are created. Materials are ordered again as a precaution, larger buffers are built, or additional quantities are sent to the service provider.

This reduces the perceived risk in the short term, but worsens capital binding. Especially with high-quality raw materials or customer-specific components, substantial liquidity can be tied up outside the company's own plant.

Express costs and special trips reduce the margin

If a delay is detected too late, costly countermeasures are often the only option. These include express pickups, special trips, additional shifts, last-minute supplier changes, or a rework.

The customer order may still be completed on time, but economically it is significantly worse than planned.

Scrap and rework distort the calculation

If scrap quantities or additional processing steps are not directly assigned to the production order, the deviation between pre-calculation and post-calculation remains incomplete. Quotes for subsequent orders will then continue to be based on unrealistic cost assumptions.

From an isolated operational case, this becomes a recurring margin error.

Lack of traceability increases the quality risk

For products requiring batch numbers, serial numbers, or documentation, it must be traceable which material was processed when and by which service provider. If full material and process information are missing, root-cause analysis for complaints becomes significantly more difficult.

Suppliers cannot be evaluated objectively

Without structured target and actual data, evaluating the contract manufacturer remains subjective. The collaboration is judged based on individual experiences or personal impressions.

For a robust supplier evaluation, the following information is needed, among others:

confirmed and actual return delivery date
complete and on-time delivery quantity
scrap and complaints rate
frequency of rework
price deviations and additional costs
responsiveness to changes
quality of feedback and discussions.

Solution: Managing subcontracting as part of the production process

How a transparent extended production line should be structured

An efficient subcontracting does not begin with the order. It already begins in the master data and in the work plan.

The external operation must be integrated into the entire process chain as a regular production step. At the same time, it requires purchasing, warehouse, logistics, quality, and costing information.

The end-to-end planned process

Process step	What must be transparent
Process step 1. Production Planning	What must be transparent Which operation is performed externally?
Process step 2. Requirements Planning	What must be transparent What quantities and which supply materials are required?
Process step 3. Supplier Selection	What must be transparent Which subcontractor takes on the operation at what price and date?
Process step 4. Purchase Order	What must be transparent What service is ordered for which manufacturing order?
Process step 5. Material Provisioning	What must be transparent What materials, quantities, batches or serial numbers are handed over?
Process step 6. Shipping	What must be transparent When and with which accompanying document does the material leave the plant?
Process step 7. Stock at Subcontractor	What must be transparent Which of our own stock is currently with the subcontractor?
Process step 8. Processing Status	What must be transparent What quantity is open, in work, finished, scrap or rework?
Process step 9. Return Delivery	What must be transparent What quantity will be returned and when?
Process step 10.Quality Inspection	What must be transparent Which parts are released, blocked or claimed?
Process step 11.Production Progress	What must be transparent Which follow-up operations can begin?
Process step 12. Costing	What must be transparent What actual subcontracting, transport and subsequent costs have arisen?
Process step 13. Supplier Evaluation	What must be transparent How reliable, punctual and quality-oriented is the service provider?

Anchor external operations in the work plan

An external operation should already be defined as such in the production structure. This makes visible that for example after turning there is an external heat treatment and only then the internal grinding follows.

The external processing time thus becomes part of forward or backward scheduling. If the return delivery date changes, the system must re-evaluate the effects on the total order and the subsequent processes.

Clearly assign supplied material

Provided materials require a clear reference to the external operation, to the service provider and to the manufacturing order. It must distinguish between:

Material that is fully supplied
Material that is partially provided by the subcontractor
Packaging units or multi-quantity lots that remain with the partner
Rest material that must be returned
order-related and freely available material

Only in this way can it be prevented that material at the partner is considered consumed, even though it still belongs to our own stock.

Use a subcontractor warehouse for stock at the service provider

A subcontractor warehouse represents the physical location of our own material outside the plant. The material is thus not removed from transparency, but merely rebooked to another storage location.

Report partial quantities and deviations directly

Subcontracting does not always go exactly as planned. Therefore, a robust process must be able to map partial deliveries, scrap, bulk quantities, rework and remaining quantities.

A partial quantity can then already be released for the next operation while the remaining parts are still with the service provider. This prevents a complete order from standing still, although there is already enough material for a partial call-off.

Link information directly to the transaction

Drawings, specifications, inspection plans, packaging requirements and quality requirements should be clearly linked to the transaction. It is crucial not only that a document exists but that the partner receives the correct version.

Changes must be traceable and passed on to the affected process.

Systematically compare planned and actual dates

The confirmed return delivery date should not only be in an email. It must be stored in the planning system and updated when changes occur.

This allows to identify:

which return deliveries become critical
which follow-up operations are affected
which customer orders are at risk
where replanning is needed
whether an alternative service provider or internal production makes sense

Fully post-cost subcontracting

A meaningful post-costing takes into account the actual costs incurred for the external operation. In addition to the supplier invoice, depending on the process this also includes transport, packaging, quality inspection, scrap and rework.

Abas ERP provides pre-, in-process and post-costing and can analyze costs down to the operation level. This allows insights from completed production orders to flow back into future orders and master data.

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Abas approach: Integrate subcontracting throughout planning and material flow

How Abas ERP supports supports subcontracting

Abas ERP binds subcontracting as a fixed component in the production planning. This makes external processing steps not treated as isolated special processes, but linked with material requirements, scheduling, purchasing, warehousing and costing.

Generate subcontract manufacturing proposals from planning

If external refinements are planned as part of subcontracting, Abas ERP Disposition can generate subcontract manufacturing proposals from them. Material requirements remain assigned to a specific buyer. The resulting procurement proposals can be reviewed and released as manufacturing orders or purchase orders.

Make-or-buy decisions flexibly

Not every operation has to be permanently performed in-house or externally. In cases of capacity peaks, machine failures or changed delivery times, it may be necessary to change the procurement type on a per-operation basis.

In Abas ERP, for the same item, both manufacturing and supplier-provided parts lists can be stored. This allows relying on prepared structures when switching between in-house production and external procurement.

Consider material and scheduling planning together

The Abas ERP Disposition monitors changes to dates, quantities, stocks and capacities. Effects on the quantity and timing framework lead to new or adjusted procurement proposals.

Thus late external processing can be seen not only as a purchasing issue. It becomes visible in connection with material requirements, manufacturing orders and target dates.

Transparent management of external stocks

Abas ERP supports external warehouses and records material movements in the warehouse movement journal. Quantity, time, storage location, batch or serial number, and the reference to project or customer order can be traced.

Identify critical procurements early

Through the procurement status, procurements across the stages of a make-to-order production can be tracked. Abas also offers the ability to determine the critical path with processes, triggers and target dates. In case of bottlenecks, capacities can be rescheduled or make-or-buy decisions reevaluated.

Incorporate real costs into future orders

Through pre-, ongoing and post-calculation plan and actual values can be compared. This allows analyzing external service costs and other deviations at the operation level and incorporating them into future calculations.

Case study: How ERNST Umformtechnik networks its subcontracting processes

Supplier integration, communication and traceability in an end-to-end process

ERNST Umformtechnik uses Abas ERP at locations in Germany, France, China and the USA. The company uses the system, among other things, in sales, purchasing, Controlling, project management, production planning, accounting and warehouse management. For its own subcontracting processes, ERNST uses a specialized Abas B2B portal for order processing and communication with suppliers and their subcontractors.

The example directly addresses the core issue of contract manufacturing: Not only the order but also the communication with the involved partners is integrated into the ERP process.

“Thus we implemented our supplier integration with the Abas ERP system using the Abas eBusiness Solution. This significantly simplified communication with our suppliers.”

Rolf Wingert, IT team leader at ERNST Umformtechnik

In addition, items and stock movements are captured using identification systems such as barcode scanners. According to ERNST, Tracking & Tracing of the products was made possible only through the implemented barcode scanner solution.

The concrete benefits in the context of subcontracting

Communication with suppliers is directly integrated into the ERP process.
External partners and subcontractors are integrated into order processing.
Material movements can be captured using identification systems.
Tracking & Tracing improves the traceability of the products.
Purchasing, Production planning, inventory and other business areas operate within the same system context.

Read the ERNST Umformtechnik experience report.

Further practical experiences

"This has greatly simplified communication with our suppliers."

Rolf Wingert, IT-Team Lead, ERNST Umformtechnik

"The tracking & tracing of the products has become possible only with the implementation of the barcode scanner solution."

Rolf Wingert, IT-Team Lead, ERNST Umformtechnik

"With Abas, we have information available at the push of a button."

Florian Grenda, Project Manager, Lignotrend Produktions GmbH

Discover more of our customers' experiences.

Advantages at a glance: What an integrated contract manufacturing control improves

Transparent material inventories

You can see which of your own materials are located at the plant, in transit, or with the contract manufacturer.

More reliable delivery dates

External processing times are incorporated into production planning and scheduling.

Less manual coordination effort

Purchasing, planning, warehousing and production access a common data base.

Early response to delays

Critical returns and their impact on subsequent operations become visible earlier.

Seamless traceability

Material movements, batches, serial numbers and order references remain traceable.

More realistic calculations

Actual outsourcing costs and variances can be incorporated into the post-calculation.

More flexible make-or-buy decisions

Operations can be planned internally or externally depending on capacity, costs, or deadlines.

Better supplier evaluation

Delivery, quantity, and quality deviations provide a solid basis for future awarding decisions.

Conclusion: Subcontracting must not become a digital blind spot

Outsourcing provides flexibility, access to specialist knowledge, and additional capacity. It only works reliably if external steps are planned and controlled as consistently as the processes in one's own plant.

Key is an end-to-end connection of manufacturing order, external operation, supplied material, external storage, order, feedback, quality inspection and calculation. Only then does it become visible where material is located, when it will return, and what consequences a deviation has for production, delivery date and margin.

Abas ERP integrates subcontracting into the manufacturing planning and connects it with planning, purchasing, storage and cost consideration. This keeps value creation controllable even when part of it takes place outside your own company.

Manage outsourced manufacturing without losing control with Abas ERP

If outsourced processes, unclear material stocks, or delayed returns are slowing down your production planning, it's time for end-to-end control.

Now see for yourself for free: discover how outsourced operations, consigned materials, delivery dates, and production orders work together in a single system.

Experience Abas ERP

FAQ: Frequently Asked Questions about ERP subcontracting

Why does contract manufacturing often lead to a lack of transparency?

Problems arise especially when orders, production orders, material movements, and supplier communications are managed in separate systems. As a result, it is not clear which materials are with the service provider, which quantities have already been processed, and when the return shipment occurs.

How can subcontracting be represented in the ERP system?

An ERP system should directly incorporate external operations into the production process. This includes determining material requirements, placing orders for external services, provisioning and handing over material, managing external stock, reporting processed quantities, and handing over to subsequent production steps.

What happens if the contract manufacturer delivers late?

In integrated scheduling, the delay related to the production order is considered. This makes it possible to identify which subsequent operations, capacities and customer orders are affected. The scheduling can then reschedule, take partial lots into account, examine alternative suppliers, or reassess a make-or-buy decision.

How does contract manufacturing affect post-costing?

In addition to the price of the external service, transport, packaging, quality inspection, scrap, rework and express surcharges may arise. If these costs are allocated to the production order and operation, standard and actual costs can be compared. This makes margin variances visible and future bids can be calculated more realistically.

Which KPIs are important for managing contract manufacturers?

Key performance indicators are on-time delivery performance, processing time, open quantity, scrap rate, rework rate, price deviation, frequency of complaints, and completeness of feedback. These metrics support operational control and an objective supplier evaluation.

Can Abas ERP switch between in-house production and contract manufacturing?

Abas ERP enables adjusting the procurement method to the situation. For the same item, manufacturing and customer-supplied parts lists can be prepared. This makes it possible to switch between internal production and external procurement depending on capacity, material availability, or scheduling.

How does ABAS ERP supports subcontracting?

Subcontracting are part of abas manufacturing planning. External refinements can trigger contract manufacturing proposals. Additionally, material requirements, external warehouses, procurements, deadlines and manufacturing processes can be managed within an end-to-end system context.